Technical Analysis

Table of Contents

Technical analysis: How to read the charts and trade?

Technical analysis (TA) is a tool which is often used by traders. With TA you try to make an assumption about the most likely next move, based on historical price trends. This works on anything, from stocks to forex and from commodities to crypto.

However, technical analysis is not just about drawing some lines on a chart or using fancy indicators for buy and sell signals. The method of analysis is over 100 years old and has become increasingly sophisticated over the years. The basis, however, has always remained the same. And it is precisely this basis that is so important to understand, before you get lost in complicated indicators and dozens of different strategies.

The basic principles of TA

Before you start reading and studying TA it is good to know is that technical analysis is partly visual and there is not necessarily one correct outcome. Different analysts may make different analyses. Charts are very helpful for everyone, but especially traders and investors. The price can be seen immediately, but the direction (trend) of the market is also often easy to read. In this way, the graph excellently exposes the behavior of the market.

A technical analyst always assumes that prices move in a trend and that history repeats itself. The reason for this is simply to be found in the (herd) behavior of people. Humans tend to repeat behavior and that is why we see the same patterns recurring repeatedly in the crypto markets. In the introduction below I will explain the very important ‘basics’ of technical analysis, so you too can start analyzing the charts.

Candlestick charts

The preference of most technical analysts is the so called ”candlestick charts”. These charts show the price development by means of thick squares that look like candles. A ”green candle” indicates a rising price, and a ”red candle” indicates a falling price, in reference to the candle before.

You can set up the charts however you like. If you choose a daily chart one candle represents one day. This is one of the most used time frames. But you can also choose candles of one minute or for example 4 hours. In case of a green candle the colored part at the top is the price at which the candle closed. The bottom of the green part is the opening price. The stripes at the bottom and the top which you sometimes see are so-called “wicks”. The price has been trading there, during the movement of the candle.

What are trends?

There are only 3 different trends in TA and prices always move in one of those and charts always show the same cycles. We only know: sideways trend, uptrends and downtrends. However, the trend can be different on any timeframe. So, when you are charting a coin, always ask yourself, which timeframe am I looking at. The best thing you can do is trade with the trend, as the trend is your friend. Start by analyzing the higher timeframe, weekly and then work your way down to daily, 4h, 1h and for intraday trading and entering positions go as low as 15 minutes.

Markets move in cycles, but cycles exist on weekly timeframes and on 5 minutes timeframes for example. According to Wyckoff, the market can be understood and anticipated through detailed analysis of supply and demand, which can be ascertained from studying price action, volume, and time. The time to enter long orders is towards the end of the preparation for a bull market/uptrend. While the time to sell or initiate short positions is at the end of the preparation for a bear market/downtrend.

Technical Analysis what are trends

A sideways or neutral trend. In this case the price is moving in a sideways direction between two areas. At the bottom is a clear support area, from which the price always (at least twice) manages to rise. A resistance area is a price level where the price seems to make a top every time (at least twice).

Sideways Trend

The sideways trend is not very interesting. After all, you want to make money with long-term rising prices. Nevertheless, there is also money to be made in this period. For example, you can buy when the price is in the support zone. However, a closing position below the support zone means a weakening and then the price could drop further. Before that happens, you want to sell your positions. So, place your stoploss like 1/2% below that support when entering a long.

Between this support and resistance, you can trade. As a matter of fact, you can always try to buy your currency at support and sell it again around the resistance level. This strategy is especially interesting for the more active trader.

In case of a break-out the sentiment will change and consequently also the trend. A breakout above resistance usually signals the start of a rising trend. A breakout below an important support often signals further price declines. This chart shows an example of a neutral trend, but with huge movements.

Rising Trend

The “rising trend” is characterized by higher tops and higher bottoms. This indicates that buyers are willing to enter or to buy at an increasingly higher level. Often after a breakout we see a pullback to the former resistance. The new higher bottom will then be at or around the old resistance. At that point, the old resistance flips into a support level. As long as the pattern of higher tops and bottoms remains visible, we speak of a rising trend. The trick is to stay in position as long as possible during a rising trend. Those who sell too early may miss out on substantial profits.

In charts we can also draw so-called trend lines. We do this by connecting multiple tops or support points. It is important that the line has at least two, but preferably three contact points. The more points of contact a trend line has, the more valid it is.

With trendlines, diagonal support and resistance points arise. They often also give a good idea of the direction of the trend. The trend channel helps you determine if the price is still in a rising trend. However, if the price still shows higher highs and higher lows, the price could still be in an uptrend. So, keep that in mind.

Eventually, every rise comes to an end, and leads to another sideways trend. Of course, you also want to sell again at a profit. Therefore, determining your exit point is just as important as determining the buying moment. You want to sell before the price gets back into a downward trend.

Sell Signals

Before you get a sell signal, there is usually a lot going on. First the price might show a lower top. Or a break-out may be given back and ends up being a false break-out. It is also possible that a double or triple top will be formed. Eventually the price will often drop below the rising trend line or fall out of the trend channel.

If the pattern of higher highs and higher lows break, the rising trend ends. In that case you do not necessarily have to sell immediately, because it is possible that the price will first change into a sideways range, and then start a new rising trend. For example:

The real sell signal only occurs after the last confirmed bottom is broken. It is therefore smart to always move your stoploss upwards, a little below the newly formed confirmed bottom.

With a confirmed bottom we refer to a bottom (support), of which the price has clearly bounced up and then risen above the last top. With a stoploss order you can indicate the point at which you want your positions to be automatically closed by the system. Some traders prefer a mental stoploss or an alarm, since support levels are often broken only during the candle(intraday), but the candles eventually close above the support.

The break-out below this important support line (bottom) thus usually constitutes a sell signal. The price may then change into a downward trend, recognizable by the lower tops and bottoms.

To recognize trends, it is good to first determine what type of investor you are. How much risk are you willing to take? And how much time can you devote to crypto? Technical analyses on daily and weekly charts work very well and then you don’t have to be busy with trading day and night, for example. The more active traders can also look for technical signals on 4- and 1-hour charts. The lower timeframes, however, require much more experience and time.

Indicators and patterns

Above we only talked about the very important basics of TA, the visual analysis. Part of visual analysis are chart patterns.

Price patterns are a part of visual analysis in technical analysis. As you know, technical analysis assumes that prices move in a trend fashion and that history repeats itself. That is, we encounter the same cycles and price patterns on charts repeatedly. Studying these price patterns is therefore an important part of technical analysis.

Based on recurring patterns, we can recognize trend changes in time. Moreover, we can use these patterns to calculate price targets and make statements about the most likely direction of an underlying asset.

Head & Shoulders Pattern

Head & Shoulders pattern is one of the most important patterns in my opinion:

Here’s an example of an inverted head & shoulder pattern on Tradingview:

Triangle Patterns

Asides the head & shoulders pattern, triangle patterns are very important. Here are some examples:
Technical Analysis Triangle patterns

Trading tips and tricks: profit taking and stoploss

Always look for trades with a positive risk/reward. U should win twice as much as you can lose every trade. If you win 50% and lose 50% you will still make profit this way. In reality your win ratio will be closer to 70/80% which will leave u with a nice profit.

After you enter a trade, you determine your optimal profit taking levels. However, in practice you will notice that many of your favorable profit taking levels never get reached. That’s why it is important to have multiple levels where you take partial profit. Also try to pick profit takin levels a little below important resistances, to front run others in the market.

For example, 4 profit taking levels: Take 25% profit on every level. In addition: after you took profit and the price was high enough, you can decide to move your stoploss to below the last confirmed bottom. If you don’t do that, keep the earlier stoploss, because you already reduced your risk by taking partial profit.

A $1000 trade; 5% stoploss and you want to take profit at 10% / 20% / 30% and 40%.

You close 25% of the trade at 10% profit and 25% at 20% profit. U have now closed $500 of your original position with a profit of $75. You only have $500 left, and if your original stoploss hit you will lose $25. So, with 2 profit takers and your original stoploss you will still have $50 profit left, which is 5% on a position of $1000. If you moved your stop to break-even after the second target was hit, you will leave this trade with $75 profit which is 7,5%. Not much difference.

This is just the beginning…..

In our next post you’ll learn all about Japanese candles!

Feel free to ask us to write about specific technical analysis terms.